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Abstract
Over the past three decades, the price of machinery and equipment has fallen dramatically relative to other prices in advanced and emerging market and developing economies alike. Could rising trade tensions, a slowing pace of trade integration, and sluggish productivity growth threaten this potential driver of investment going forward? This chapter sets out to answer this question by documenting key patterns in the price of capital goods, its drivers, and its impact on real investment rates. Worldwide, investment growth has slowed considerably since the global financial crisis of 2008–09. Yet, when compared with its levels in the early 1990s, real investment in machinery and equipment as a share of real GDP has increased significantly. The chapter finds that the decline in the relative price of tradable investment goods has provided sizable impetus to the rise in real investment rates in machinery and equipment over the past three decades. The broad-based decline in the relative price of machinery and equipment, in turn, has been driven by faster productivity growth in the capital-goods-producing sector and rising trade integration. Yet, emerging market and developing economies still face higher relative prices of tradable investment goods, consistent with their higher policy-induced trade costs and lower productivity in the tradable goods sector. Taken together, the chapter’s findings provide an additional, often overlooked, argument in support of policies aimed at reducing trade barriers and reinvigorating international trade. The analysis also highlights the importance of continued technological progress to maintain the pace of decline in relative capital goods prices, which has provided an important tailwind to investment around the world.
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